Insights 
VT 
In July 2025, Germany’s final services PMI reached 50.6, slightly above the preliminary estimate of 50.1 and an increase from the prior 49.7. The final composite PMI matched the preliminary at 50.6, also above the previous 50.4. These figures suggest a slight recovery in the services sector.
Inflationary pressures in Germany have eased to their lowest point since early 2021. Costs in the services sector rose at the slowest rate since February 2021, paralleling a decrease in wage growth reported by the European Central Bank’s Wage Tracker. Consequently, companies raised their selling prices at the lowest rate observed since April 2021.
Business Activity Update
Business activity in the services sector picked up after a three-month stagnation. New business in services showed an increase for the first time since August 2024, though backlogged orders have decreased. The employment growth, seen since the start of the year, has nearly stalled. The modest improvement in order intakes and export business indicates Germany’s economy is gradually emerging from a prolonged period of weakness. However, the recovery is fragile with no signs of euphoria in the service sector.
The latest data shows Germany’s economy is modestly improving, with both services and manufacturing entering a growth phase. We see this as the first clear sign that the economy is starting to move past the weakness experienced since late 2024. This report is especially significant as it follows the confirmed -0.2% GDP contraction we saw in the second quarter of this year.
The most critical takeaway for us is the sharp easing of inflationary pressures to their lowest point since early 2021. This aligns with recent Eurozone HICP data, which showed headline inflation for July 2025 easing to 2.5%, getting closer to the central bank’s target. This German data strongly suggests the trend of disinflation within the Eurozone’s largest economy is accelerating.
This changes our view on the European Central Bank’s next move. We should now position for a less aggressive ECB, as the justification for further rate hikes is weakening considerably. This means looking at interest rate futures, such as those tied to ESTR, to bet on borrowing costs not rising further and potentially falling sooner than previously expected.
Market Opportunities
For equity markets, the modest growth outlook is a tailwind for the German DAX index. We believe this data can support a continued, gradual climb from the lows we saw at the end of 2024. Therefore, using call option spreads on the DAX seems like a prudent way to capture this potential upside while limiting risk in what is still described as a fragile recovery.
The mixed signals in the report, flagging both growth and stalling employment, suggest a market that will likely grind higher rather than rally explosively. Looking at the VSTOXX index, which measures Eurozone equity volatility, it has been declining since its peak in early 2025 but remains elevated compared to historical averages. We see an opportunity in selling this elevated volatility, perhaps through strategies like iron condors on the DAX, assuming a stable, range-bound market.
Finally, a less aggressive ECB creates a policy difference when compared to other central banks, such as the U.S. Federal Reserve, which is holding rates steady due to more persistent domestic inflation. This divergence is typically negative for a currency. As a result, we anticipate potential weakness for the Euro and will be looking at derivatives that could profit from a decline in the EUR/USD pair in the coming weeks.
